Digitizing accounting – seven steps to paper-free bliss

Digital accounting is not just a trendy fad. In fact, it simplifies longstanding analog processes, transforming them with electronic invoices and digital processes. Your employees will love it, and your company will profit as well. But where should you start? This article explains how to digitize your accounting system, discusses the advantages and possible disadvantages of these digital processes, lays out the first steps for making the transition and details the laws and regulations to factor in as you embark on this journey of digital transformation.

What does “digitized accounting” really mean?

Putting paper-based accounting processes out to pasture and replacing them with paper-free bookkeeping is the goal of digital accounting. In general, this refers to all accounting-related processes. Outgoing and incoming invoices as well as the associated upstream and downstream processes should all be implemented digitally.

Why digitize your accounting?

Digital accounting is not an end unto itself. Quite the contrary. Digital accounting processes will make your work more efficient. The goals of your digitization project are increased transparency (“finding instead of searching!”) and accelerated workflows based on digital process automation. You may think that just sounds like marketing, but it is so much more. For example: In our experience, the time from arrival of an incoming invoice to its booking goes from 26 minutes in a paper-based system to 2 minutes for digital invoices. Actually, that is nothing new. In fact, a 2013 study by BMI, the Goethe University Frankfurt and the Forum for Electronic Invoicing Germany (FeRD) concluded that “the use of electronic invoice processing can lower administrative costs by up to 80%”. Of course, digital accounting has additional aspects that help in other company processes. More on that in a minute.

Advantages of digital accounting

You are no doubt asking yourself the question of why you should switch to digital accounting from your current analog system that works just fine. This thought is understandable. Why change without a reason? We all know the saying: “Never change a running system.” However, digitalizing your accounting will offer you and your employees the following advantages:

• Transparency and access from any location

Digitized accounting will make all your accounting processes crystal clear. Never again will you find yourself hunting down or asking about specific invoices – and your regular commutes to the filing cabinet will be a thing of the past. Invoices can be located instantly within a digital accounting system. The digital accounting software always keeps all the invoices still being processed in a convenient incoming invoice basket. Plus, every digital invoice is flagged with its current processing status, and that is all in addition to the user-friendly search functions. And let’s not forget another huge benefit: All this information is available at any time and from any place.

• Automation of many workflows

One hallmark of electronic invoicing is automation of the process workflows. In other words, every step – from receipt of the invoice to its booking – is automatically assigned to the right processor. Additional automation options are also available, of course, such as defining substitutes in case employees are absent and a workflow for escalation management in case an invoice gets stuck somewhere in the process. It is quite clear that digital accounting frees up your employees’ time – which translates directly into greater efficiency.

• A digital archive to replace file cabinets

Once you have digitized your accounting, you’ll have all your invoices, business correspondence, etc. on hand in digital form. You can digitize business documents on paper by scanning (plus OCR). And vendors that still send their invoices by regular mail can certainly be incentivized to send email invoices. This will make things much easier for you, while also reducing your expenses: You will no longer need archive rooms and file cabinets. However, digitizing your invoices does entail some legal requirements.

• Legally compliant digitization

All business processes that are implemented digitally must comply with GoBD* and GDPR* rules. Modern digital accounting systems have this functionality built-in. The software/service providers also offer technical support and advice.

*Principles of Orderly Accounting and Storage of Accounts, Drawings and Documents in Electronic Form and for Data Access **European General Data Protection Regulation

Are there any potential drawbacks to digitizing your accounting?

“Drawbacks” isn’t really the right word. With a little foresight, many potential pitfalls of digitizing your accounting system can be avoided. Let’s take a look at the typical stumbling blocks that can arise in the digital transformation and in automating your bookkeeping: 

• Longstanding processes: If you intend to digitize your accounting, well-established processes and procedures will have to be re-evaluated. It is worth taking a detailed look at whether the processes themselves can be improved. Process optimization is the name of the game – especially before introducing new accounting software. After all: What use is the best software if the invoice process, with all its approval steps, etc., is suboptimal and in need of improvement.

• Including employees at an early stage: It is particularly important that accounting and bookkeeping employees who have been doing their jobs for years be involved in the project from the very start. Ideally, all departments involved should appoint representatives (stakeholders) who can contribute their knowledge to the project and share the details of the project within their own teams.

• Hardware and software:  One cost-intensive aspect: Workstations (desktop computers), scanners and the hardware for the accounting software itself all have to be procured. However, the providers on the market would be glad to assist you in selecting the right hardware. The times of costly procurement processes are over.  After all, many providers of cloud-based accounting software exist today. You enjoy the advantage of eliminating high purchasing costs for software that you might not keep using forever anyway. With cloud-based software, the case is quite the opposite. You can use it just as much and as long as you like: transparent, simple and effective.

• Digitization of existing invoices and documents: Yes, you do have to keep these documents for between 6 and 10 years since they are relevant to your business and to your tax filings. The archiving rules of the tax authority require this. You have to make a decision here: Will you continue to maintain your tried-and-tested analog archive in parallel with your new digital accounting system for many more years to come? Or would you like to digitize your entire accounting all at once – including a digital archive? If you choose full digitalization, you will have to have your existing documents, receipts and invoices scanned in and digitized. You will have to assign this task to one of your employees.

• Data security and data protection: While “data protection” is about protecting personal data, “data security” is about protecting all data in general. Both topics go hand in hand.

How do I go about digitizing my accounting processes?

There are certainly many paths a digitization project can take – some are rocky and filled with surprises, while others are smooth and easy. The following steps have proven to be the best practices for the digital transformation of accounting:

Include stakeholders from various departments

Appoint a project manager with official authorization to run the project at the company. Take care to assemble the right group of stakeholders. After all, processing invoices generally involves other departments in addition to Accounting. It is important to make a good choice here.

Find the right accounting software

Software for digitizing accounting processes has been around for many years. The first key difference lies in the type of delivery. You will have to make a decision. Do you want on-premises accounting software – in other words, running on your own hardware – or would you prefer to use a cloud solution? Hybrid options are also available, meaning a mixture of on-premises and the cloud. It is important to know your own needs very well and to make your decision accordingly.

Pay attention to the integration of upstream and downstream processes from ERP/CRM systems

If you are digitizing your accounting processes, you should know and document in advance which systems will need to “speak” to the future accounting software. Interfaces with ERP and CRM systems will be necessary. This aspect is also crucial to fully benefit from seamless digital processes.

Include tax consultants in the project

After you have made an initial choice of accounting software, it’s time to bring in an expert. To stay on the safe side of finance law, companies should always bring their tax consultants on board with the project as soon as possible. As you have already learned, digitizing accounting processes always means remaining in compliance with the data archiving principles stipulated by the tax authorities. Your tax consultants know how and where the future digital accounting system must comply with these requirements. This step is essential for a successful digitization project.

Establish milestones – create a project plan and timeline

A clear, realistic perspective ensures reliable planning of the entire project. How many employees will be needed? How long will the project take? Will external service providers be used, and if so, for which tasks? Ideally, you should also develop a project plan. The project plan defines key milestones and the associated responsibilities in the project – all the way to the finish line.

Check for compliance with privACY rules

The standard versions of accounting software available on the market generally support you in principle in complying with the statutory requirements, such as the GoBD and GDPR. However: When you digitize your accounting system, much depends on the specific case and how you implement your digital processes. It is worth taking a very close look here. IT and tax experts must be consulted. Once they give you the green light, you can start building the process documentation for your digital accounting. By the way: Once you have this documentation in hand, you won’t have a thing to worry about when the auditor comes around.

Let’s get started: The best way to digitize your accounting is to start with a proof of concept

In our experience, the best way to ensure successful implementation of digital accounting solution is with a proof of concept. With this proven method from IT project management, you initially limit use of the application to a selected area. Then you create a prototype for this area. The major advantage of this method is that you can reinforce the introduction of digital accounting in your company with concrete experiences.

. In this pilot phase, you have the opportunity to technically test the functionality and compatibility of your solution in an actual process environment. This helps you identify whether the interfaces work properly and whether the accounting software is truly 100% compatible with your landscape and the linked technical processes. Plus, you can use this pilot phase to test the migration of individual accounting processes with a limited set of users. This gives you the opportunity to discuss individual process steps in detail so that very precise adjustments can be made later.